Today’s Blog – Wednesday 10th May 2017

Yesterday the Australian Commonwealth Government set out its annual budget plans. Amidst the general handouts and tax rises, there were a few items of interest therein for the energy sector, as follows:

An allocation of A$5.2M to conduct feasibility studies into new pipelines from Western Australia and the Northern Territory to the East Coast (pssst, Mr Prime Minister, for half price, we will provide you the Executive Summary: “they are not economic and won’t happen”). And BTW, its cheaper to import gas by boat.

An effective A$5B offer to buy out the States of Victoria and New South Wales from Snowy Hydro Corporation – thereby freeing up the Feds to spend another A$2B on a pumped hydro facility. Who knew we are so rich! As US Senator Everett Dirksen famously said: “A billion here, a billion there, and pretty soon you’re talking about real money.”

Notwithstanding the famous love of States for cash (as summed up well by Paul Keating: “never get between a State Premier and a bucket of money”) – we think the States won’t want to sell such a politically iconic asset.

Other energy related infrastructure might also be in line for the shower of cash being sprayed around – for instance, we think other States’s will want “things” in their regions and will seek funds for e.g. looking at a pipeline linking the Northern Bowen Basin with Southern Queensland, etc.

Commodity prices

Crude prices slipped down again yesterday, with Brent falling ~1% to US$48.97 and WTI down ~1.3% to US$45.88. An EIA report forecasting rising US production, combined with a stronger US dollar, were the key bear-ish factors of the day. All eyes will be on the EIA’s weekly inventory report due out tonight to see if predictions of a large fall are borne out.

Henry Hub rose ~1.2% to US$3.21.

LNG and international gas

Woodside Petroleum’s (WPL) CEO, Peter Coleman, has recently spoken about plans for the North West Shelf JV’s liquefaction assets that his company operates and which face declining feedstock from the JV’s own dedicated fields. These were to open up a capacity tender – to which other fields in which the liquefaction owners such as WPL – and third parties – could make bids for.

The end road for this sort of process is having different owners for infrastructure and upstream assets – but we suspect the conservative Australian E&P sector will dawdle rather than sprint down that path.

The DLNG liquefaction owners face a similar issue and may well decide to go down a similar tender route if the NWS JV process is seen to be successful template.

Disruption

We occasionally note that some of the most significant pressure on greenhouse exposed companies like miners and oil companies is increasingly coming from the private sector as much as from regulatory intervention – with for instance an increasing number of institutional investment mandates seeking to reduce exposure to the sector (thereby arguably increasing its cost of capital).

In light of this, a recent report pointed out the effect of the “buy renewables” electricity push by the world’s largest companies was adding up – in MW – but perhaps more importantly in agenda-setting. Between them, Apple (No. 1 by market cap), Google (2), Microsoft (3), Amazon (4) and Facebook (a lowly 8) are now buying >3,000 MWs of electricity capacity from renewable only sources.

Moody’s summarised the position as follows:

“The companies leading the effort often have in common high credit ratings, significant financial flexibility and robust liquidity. Therefore, they can afford to take a longer view to managing their business objectives, which more easily allows them to invest in these renewable energy sources directly and help influence change in the architecture of the renewables industry.”

Quote of the day

The Federal budget reminded us of a quote from a US Congressman about a 1980s era budget giveaway (whose name we can’t track down – if anyone has our copy of The Triumph of Politics – please return it).

“It would have just about been cheaper to give everyone three wishes”.